ECONOMY OF INDONESIA

Indonesia was often mentioned as an appropriate candidate to be included in the BRIC

countries (Brazil, Russia, India and China). Another set of emerging economies - grouped under
the acronym CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) - also
gained attention as its members have reasonably sophisticated financial systems and fast-
growing populations. Several years ago the combined gross domestic product (GDP) of the
CIVETS was predicted to account for half the global economy by 2020. However, since the
prolonged global economic slowdown after 2011 we rarely hear the terms BRIC and CIVETS
anymore.

Another important example of international recognition regarding Indonesia's economy

are the recent upgrades of the country's credit ratings by international financial services
companies such as Standard & Poor's, Fitch Ratings and Moody's. Resilient economic growth,
low government debt and prudent fiscal management have been cited as reasons for the upgrades
and are key in attracting financial inflows into Indonesia: both portfolio flows and foreign direct
investment (FDI). These FDI inflows, which had been relatively weak for Indonesia during the
decade after the Asian Financial Crisis had seriously shaken up the foundations of the country,
showed a steep increase after the global financial crisis of 2008-2009 (although somewhat
weakening after 2014 due to Indonesia's prolonged economic slowdown in the years 2011-2015).

Although Indonesia is eager to reduce its traditional reliance on raw commodity exports
and boost the manufacturing industry (for example through the 2009 New Mining Law), it is a
difficult path particularly because the private sector remains hesitant to invest. This
transformation is important because falling commodity prices after 2011 (which are the result of
stalling economic growth of China) has impacted drastically on Indonesia. Indonesia's export
performance weakened significantly, implying fewer foreign exchange earnings and reduced
purchasing power, hence causing an economic slowdown.

The Indonesian government under the leadership of Joko Widodo (who was inaugurated
as Indonesia's seventh president in October 2014) has implemented several structural reforms
that aim at long-term growth but cause some short-term pain. For example, the majority of fuel
subsidies have been scrapped successfully, a remarkable accomplishment (as fuel subsidy cuts
have always caused outrage among the population) aided by the globe's low crude oil prices.
Moreover, the government places high priority on infrastructure development (evidenced by the
sharply rising government infrastructure budget) and on investment (evidenced by deregulation
and fiscal incentives that are offered to private investors).

But back to the basics: what are Indonesia's strengths that explain structural macroeconomic
growth?

Abundant and diverse natural resources

Young, large and burgeoning population (rapidly expanding middle class)
 Political stability (relatively)
Prudent fiscal management since the late 1990s
Strategic location in relation to the giant economies of China and India
Low labour costs
Being an emerging market, there is a lot that needs to be built/developed

Indonesia is a market economy in which the state-owned enterprises (SOEs) and large
private business groups (conglomerates) play a significant role. There are hundreds of diversified
privately-held business groups in Indonesia (a tiny fraction of the total amount of companies
active in Indonesia) that - together with the SOEs - dominate the domestic economy. As such,
wealth is concentrated at the top of society (and not unoften there are close links between the
corporate and political top of the country).

Indonesias micro, small and medium sized enterprises, which together account for 99
percent of the total amount of enterprises that are active in Indonesia, are important too. They
account for about 60 percent of Indonesias gross domestic product (GDP) and
create employment to nearly 108 million Indonesians. This implies that these micro, small and
medium sized companies are the backbone of the Indonesian economy.

There are signs that Indonesia's economic growth is starting to accelerate again after the
economic slowdown in the years 2011-2015. As such we may be at the beginning of what can
become another period of substantial economic growth. However, it should also be pointed out
that Indonesia is a complex country that contains certain risks for investments and experiences
difficulties due to the nation's unique dynamics and context. This section provides an outline of
the current state of the Indonesian economy and discusses a number of important chapters in the
economic history of Indonesia:

GENERAL ECONOMIC OUTLINE

This section offers a detailed account regarding Indonesia's current economic structure and
composition based on recent macroeconomic indicators, developments and achievements. It also
presents an introduction to the three main economic sectors of Indonesia (agriculture, industry
and services) and expounds on the contribution of these three sectors to Indonesia's national
economy.

NEW ORDER MIRACLE

President Suharto's New Order government (1966-1998) was characterized by rapid economic
growth and a remarkable reduction in absolute poverty. Both these achievements were reason
that Indonesia became known to the West as an 'Asian Miracle' in the 1980s and 1990s. This
section puts the spotlight on the New Order's economic development, while not losing sight of
some negative aspects of Suharto's prolonged authoritarian rule.

ASIAN FINANCIAL CRISIS

The Asian Financial crisis in the late 1990s was one of the biggest watersheds in Indonesian
history. Starting out as a financial crisis it quickly expanded to become a social and political one
which marked the end of Suharto's rule (that was legitimized by economic development).
Indonesia would become the country that was hit hardest by this crisis and it reversed much of
the economic progress made under the New Order regime.
 SUMMARY

Indonesia was often mentioned as an appropriate candidate to be included in the BRIC

countries (Brazil, Russia, India and China). Another set of emerging economies - grouped under
the acronym CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) - also
gained attention as its members have reasonably sophisticated financial systems and fast-
growing populations. Another important example of international recognition regarding
Indonesia's economy are the recent upgrades of the country's credit ratings by international
financial services companies such as Standard & Poor's, Fitch Ratings and Moody's. foreign
direct investment (FDI) inflows, which had been relatively weak for Indonesia during the decade
after the Asian Financial Crisis had seriously shaken up the foundations of the country, showed a
steep increase after the global financial crisis of 2008-2009 (although somewhat weakening after
2014 due to Indonesia's prolonged economic slowdown in the years 2011-2015). The Indonesian
government under the leadership of Joko Widodo (who was inaugurated as Indonesia's seventh
president in October 2014) has implemented several structural reforms that aim at long-term
growth but cause some short-term pain. Indonesia is a market economy in which the state-owned
enterprises (SOEs) and large private business groups (conglomerates) play a significant role.
There are hundreds of diversified privately-held business groups in Indonesia. There are signs
that Indonesia's economic growth is starting to accelerate again after the economic slowdown in
the years 2011-2015. This section provides an outline of the current state of the Indonesian
economy and discusses a number of important chapters in the economic history of Indonesia:

GENERAL ECONOMIC OUTLINE

This section offers a detailed account regarding Indonesia's current economic structure and
composition based on recent macroeconomic indicators, developments and achievements.

NEW ORDER MIRACLE

President Suharto's New Order government (1966-1998) was characterized by rapid economic
growth and a remarkable reduction in absolute poverty. Both these achievements were reason
that Indonesia became known to the West as an 'Asian Miracle' in the 1980s and 1990s.

ASIAN FINANCIAL CRISIS

The Asian Financial crisis in the late 1990s was one of the biggest watersheds in Indonesian
history.